Indigo: A New Chapter

Once Upon a Time
Indigo Books and Music is a Canadian-based retailer of books, gifts, and toys operating through a combination of brick-and-mortar and online sales channels. Since its inception in 1996, management grew the company to be the largest book retailer in Canada, reaching a market capitalization of C$540 million in 2018. However, growth in e-commerce and associated firms like Amazon has eroded Indigo’s market share and lowered future growth prospects, manifesting in an 80-per-cent share price decline since March of 2018. Therefore, a change in the strategic direction of the firm is necessary to revive growth prospects amid the intrusion of technology into the realm of retail.

Death of the Author
The explosive growth of Amazon has become a major battle for retailers like Indigo as they struggle to compete against the multinational e-commerce giant’s large variety of products and same-day delivery service. Furthermore, according to the Wall Street Journal, Amazon controls approximately 49 per cent of all new book sales. This shifting industry dynamic makes it increasingly difficult for brick-and-mortar book retailers to remain profitable.

Despite having an established presence in the Canadian market, with 89 large-format stores and 111 small-format stores, shifting consumer trends have caused Indigo to struggle financially. In fiscal 2019, revenues fell nearly $33 million, and the company faced a higher-than-expected net loss of $36.8 million. Ultimately, growth in the book segment of their business does not seem promising given a lowered outlook on consumer spending and the rise of digital entertainment.

To combat unprofitability and sales decline, Indigo has been investing heavily in strategic expansion initiatives. In fiscal 2018, the company grew its online distribution centre and acquired a new facility in Western Canada to improve service levels. Indigo also hired a Chief Creative Officer, Nathan Williams, to revamp and create new product offerings to differentiate themselves from online retailers like Amazon. Based on their fiscal 2019 results, Indigo’s efforts have not been enough. In a world where customers can just as easily download ebooks or wait a day for Amazon shipping, it seems that Indigo is losing its competitive edge as a convenience-oriented book supplier with an established base of customers.

Turning the Page
Between 2009 and 2015, the American Booksellers Association cited a 35-per-cent growth in the number of independent booksellers. The work of Harvard researchers suggests this growth was attributed to three factors: community, curation, and convening. Conversational and impromptu in-store recommendations at independent book retailers help build a company-customer relationship that drives repeat sales. To distinguish itself from competitors like Amazon, Indigo must secure a partnership that will offer new venues to reach customers within their communities and would be difficult to access by e-commerce competitors.

Indigo should look to public libraries as a potential partner. Public libraries have also been affected by the rise of e-commerce book retailers, with many reinventing themselves to become essential community hubs in modern urban settings. By combining bookstores and libraries, two well-loved institutions, Indigo could further reorient its value proposition by emphasizing community and experience. There are many potential synergies between the two parties, allowing bookstore visitors to explore library catalogues and giving library visitors the opportunity to immediately purchase a newer title.

Giving and Receiving
As the first step of this partnership, Indigo should implement a “give-back program” for used books. When visitors bring in books to donate to the library, they will receive a five dollar Indigo gift card for use online or at Indigo locations. This incentivizes incremental book donations that can go towards building larger library catalogues, or for use in other charitable endeavours that give books to underprivileged communities. This program is relatively low cost and highly scalable, which can easily result in Indigo having a presence in libraries across many geographies, even those where Indigo does not have a physical presence.

To better capitalize on the incremental sales resulting from the give-back program, Indigo should also work with public libraries to create airport-style Indigo stores therein. These stores will be small enough to be accommodated by libraries, yet large enough for Indigo to hold significant inventories. Indigo can sell its high margin book-reading accessories, e-readers, and bestsellers. While creating physical stores is less scalable than the give-back program and requires a longer timeframe to implement, it gives Indigo the opportunity to explore new markets it would be otherwise unable to; The Toronto Public Library, for instance, has 102 branches relative to Indigo’s 111 small-format stores.

This partnership also provides Indigo and public libraries with the opportunity to leverage one another’s data. Each organization can provide analytics on trends they are observing in their customers’ literary consumption, resulting in greater capabilities for both parties to tailor their offerings. The library could better understand which purchases they should make when expanding their collection, and Indigo can more tightly control the size of their inventory based on demand for the library’s most popular items.

Overall, this strategy will help the business attract two separate but overlapping markets: consumers who buy from bookstores and consumers who borrow from libraries. It will give Indigo a larger presence throughout cities while also helping them invest in their next generation of readers through providing an experience not attainable online. Indigo can use this strategy to bring readership back to the core of its business, while leveraging their one competitive advantage over Amazon: physical space.

Case Study: H&M
To address the significant waste created by fast fashion brands, H&M created their Garment Collecting program. Upon the donation of a bag of used clothing and textiles to an H&M store, the donator receives store credit. All donations are then divided into three categories: Rewear, Reuse, and Recycle. Any item in the Rewear segment is identified as being the highest quality and is resold as second-hand goods. Items in the Reuse category are no longer suitable for wear and are repurposed into items such as cleaning cloths. The Recycle category represents articles which are unsalvageable and are broken down to be used in manufacturing products, such as damping or insulation.

H&M offers a five dollar credit to any customer who donates on their next purchase of $30 or more, effectively setting a minimum profit from any credit redemption and preventing the abuse of stacked redemptions. In 2018, H&M collected 20,649 tonnes, leading to a minimum revenue from textile reselling of $5.2 million, plus a minimum gross profit of $10.81 for every credit that is redeemed.

Like H&M, libraries receiving book donations resulting from the give-back program can classify donated books into one of three categories: Reuse, Redistribute, and Recycle. Books in good condition which the library doesn’t have or wants more of can be added to its catalogue, excess books can be redistributed through library charity programs, and the remainder can be recycled.

Ensuring a Happy Ending
One of the largest concerns of introducing redeemable credit to donators is the potential that all gross profits are erased by the gift card’s use. Given that Indigo’s gross margin for fiscal year 2019 was 40.8 per cent, introducing a minimum spend of $15 for any purchase the credit is used on and limiting a single coupon per transaction effectively guarantees any redemption will result in positive gross profit for the business.

The nature of the in-library shop locations is such that they require a far higher capital investment than the implementation of the five dollar give-back program and are thus less scalable. Indigo should first pursue a pilot program at a high-traffic library in Toronto, with both the store and give-back program in place to evaluate the efficacy of the proposed strategy. From there, Indigo can focus in the short term on scaling the give-back program, and then slowly build in-library locations in those places where the give-back program has seen the most success.

Indigo faces a tough battle to stay alive in today’s struggling book retail industry. The proposed strategy would make Indigo more relevant to consumers by providing convenient in-person locations and reinforce Indigo’s commitment to its customers and the communities in which it operates.

Ivey Business Review is written, designed, and managed by undergraduate students at the Ivey Business School and is the only publication of its kind in the country. IBR publishes two issues annually in December and April with content created exclusively by students and maintains an active blog, curated by the IBR Editorial Board, with contributions from students and young alumni.